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Does Formula One need America more than America needs F1?: Analysis on the eve of the U.S. Grand Prix in Austin

November 14, 2012

With the first Formula One race in America since 2007 coming to Austin this weekend, Formula Money writer Christian Sylt takes a look at the economics of F1 in the U.S. Photo by MIKE LARSON

As fans flock this week to Circuit of the Americas in Austin, Texas, for the Formula One United States Grand Prix, the best indication of how important the U.S is to F1 comes by looking at how many of the sponsors in the series have their headquarters in the States. For the past five years, more of the brands involved with F1 have been based in the U.S. than in any other country. Last year 31 sponsors came from F1's traditional heartland of the United Kingdom whereas 34 were based in the U.S. They include hotel operator Hilton, semi-conductor manufacturer AMD and oil giant ExxonMobil—companies that, between them alone, are paying a combined total of around $31 million this year, according to F1's industry monitor, Formula Money. In other words, they sure aren't involved with F1 for promotion to a home crowd.

U.S.-based multinational corporations are attracted to F1 because it gives them exposure to 515 million television viewers worldwide, as well as visibility to 3.4 million spectators at races in countries as far flung as Abu Dhabi and Singapore. Luckily for F1, these companies' prime concern is not increasing awareness in the U.S. For the past five years there has been no U.S. round on F1's calendar after the collapse of talks to extend the previous race at the Indianapolis Motor Speedway. As is often the case in F1, that decision came down to money since the sport's commercial supremo, Bernie Ecclestone, wanted to increase the annual fee for the U.S. Grand Prix which stood at an estimated—and relatively paltry—$10 million. Its departure left F1 with only one race in North America, the Canadian Grand Prix in Montreal. That all changes this weekend.

On Sunday the U.S. Grand Prix will return, this time near Austin, Texas, and bankrolled by a state subsidy of up to $25 million. Along with the race comes the opportunity for F1's teams to attract even more U.S. sponsors. However, even though they may well be the biggest beneficiaries of the race, the teams aren't picking up any of the tab. Welcome to the weird world of F1 economics.

F1 is run by a company called Delta Topco which is based in the British tax haven of Jersey. Its biggest shareholder is European private equity firm CVC, which holds a 35.5 percent stake in the business. Ecclestone has a 5.3 percent stake in Delta Topco, with 8.5 percent owned by his family trust and the remainder in the hands of banks, funds and other management. It is a high-octane investment.

F1 in 2011 had revenue of $1.5 billion and it generally comes from four main sources. Starting at the bottom, trackside advertising at each race and sponsorship of the series itself comprises 15 percent of the revenue. It comes from companies such as parcel delivery service DHL and investment bank UBS, which are two of F1's official partners. Next up is revenue from corporate hospitality, freight fees and F1's junior series, which provides around 20 percent of the total. Fees from F1's 63 TV broadcasting contracts bring in 32 percent of its revenue and are second only to the money received from the promoters of the 20 races on the calendar for the right to hold those races. Together, the race-hosting fees comprised 33 percent of F1's revenue last year and came to a total of $512 million. Each race paid an average amount of $27 million but, remarkably, they do not share in any of F1's profits.

While the top 10 teams share 50 percent of F1's profits, the race tracks and their promoters generally get no money from the sport's trackside advertising, TV fees or corporate hospitality. Instead, their sole take from the sport tends to be from ticket sales. There are a few exceptions which include the promoters of this weekend's race in Austin. They have the right to sell the title sponsorship for the U.S. Grand Prix, which brings in around $6 million annually to other races. But so far, Circuit of the Americas does not have such a partner, and this year's race features no title sponsor.

The revenue from ticket sales usually barely covers the annual hosting fee—and then there are the administrative and logistical costs to hold the race, which cost almost another $20 million. It would leave a significant shortfall in the budgets of F1 races if it wasn't for investment from governments.

In emerging markets such as India and South Korea, governments gladly cover the difference because the race acts as a promotional tool which puts them on the global sporting map alongside wealthy developed nations like England and Monaco. Hosting a Grand Prix also drives tourism by promoting the country to a massive number of TV viewers. This has made the slots on the F1 calendar highly sought after by Asian and emerging nations. The bidding war between them has driven up the average annual hosting fee by $15.7 million since 2003. In turn this has priced many countries out of the market for a race, particularly in Europe where tourism is already strong enough so F1 is not needed to boost it. In many of these countries, governments have refused to bankroll the hosting fees and so races have been lost in Austria, France and Turkey.

The Circuit of the Americas track is ready for Formula One racing. Photo by MIKE LARSON

The U.S. isn't known for being in desperate need of a boost in tourism and even if it was, it seems unlikely that F1 would do the job. The U.S. Grand Prix at Indianapolis was not famous for racing incidents but for scandal which angered fans. Just three teams took part in the 2005 race as problems with the Michelin tires forced the seven others to sit it out. Fans threw bottles onto the track and later launched an unsuccessful class-action suit. It did nothing to boost the reputation of Indianapolis worldwide and the race was already hardly a magnet for international tourism; ticket sales records show that in 2004 just 5.3 percent of the 98,936 spectators came from outside the U.S.

So if the U.S. isn't in dire need of an increase in tourism, and if F1 isn't an ideal way to do it, anyway, then why is the state of Texas prepared to bankroll the race? It is down to an extremely smart deal arranged by Tavo Hellmund, the Texan entrepreneur who in May 2010 signed the original contract with Ecclestone to bring the sport to Austin.

I first met Hellmund in July 2010 in the paddock at the British Grand Prix. He was with Susan Combs, the Comptroller of the state of Texas. Hellmund had managed to make F1 eligible for the Major Events Trust Fund, a Texas state initiative designed to attract major sports events. Two months before the British Grand Prix, Combs wrote to Ecclestone confirming that Texas would pay $25 million to Formula One World Championship, the company which directly owns F1's rights, to cover the hosting fee for each of the 10 years that the U.S. race is due to take place.

Combs' letter said, “With the understanding that the first full Formula One Grand Prix will be held in Texas in 2012, full funding for the entire sanction for 2012 will be paid to Formula One World Championship Limited (FOWC) no later than July 31st, 2011.”

The $25 million has yet to be paid by Combs as she revised her offer in the wake of a very public dispute between Hellmund and his business partners last year which threatened to jeopardize the race's future. The money will now be paid out by the state after the Grand Prix takes place each year, and although a total of $25 million is still available, the amount given will depend on the tax dollars generated by the race. This itself depends on how many spectators attend the race from outside the state, not just from outside the U.S.

An independent study produced earlier this year projected that, all being well, the ceiling for the economic impact of the U.S. Grand Prix will be $293.9 million annually, with $26.4 million in tax dollars generated for the state. It forecast that there will be 120,000 spectators and, according to the race organizers, an estimated 80 percent of them will come from outside Texas.

Attaining this number of out-of-state spectators would be a significant improvement over the performance at Indianapolis, where a study of the 2004 race showed that 63.8 percent of attendees were from out of the state. However, Indiana is far smaller than Texas so the two cannot be compared directly. Nevertheless, the number of attendees who visited the 2004 race from outside an area similar in size to Texas was 37.9 percent of the total. So pulling in 80 percent of the spectators from outside Texas will be an impressive feat for Austin.

If the state pays out the full $25 million, that will cover the hosting fee. The race organizers will then only have to worry about covering the running costs since the construction of the 3.4-mile Circuit of the Americas has been funded by outside investors.

The race tickets start at $159 for general admission and rise up to $499 for a seat in the bleachers. Based on comparisons with all other F1 tracks, this would yield an average ticket price of around $230 which gives $27.6 million in ticket revenue if the race hits the forecast 120,000 spectators. The organizers also sold personal seat licenses to corporations for thousands of dollars each, guaranteeing the buyers ownership of premium seating.

In addition, Circuit of the Americas is offering 78 trackside RV sites for a hefty annual payment of $15,000 per spot. If all are sold this will bring in $1.2 million. F1 venues also get around 25 percent commission on food and drink sold at onsite stands. This brings in around $1 million while selling premium parking slots makes around half that. Likewise, merchandise spaces go for as much as $25,000, with several sold at each race.

Less expected sources of revenue are helicopter take-off and landing slots which can bring in as much as $1.5 million. It is due to the huge number of wealthy personalities involved with and interested in F1. Indeed, the world record for the busiest airport on one day is Silverstone's heliport during the 1999 British Grand Prix when there were 4,200 aircraft movements. It now averages at around 1,500 per race with each slot charged at approximately $1,000.

If Circuit of the Americas gets a title sponsor for the race at the going rate of $6 million, this would give it total revenue, in the best-case scenario, of as much as $37.9 million. Then come the costs. Staff, marketing and vehicles come to around $12.5 million. Office, admin, utilities and insurance cost a further $4 million, with all medical expenses requiring a budget of around $2 million. This gives a conservative estimate for total costs of $18.5 million, meaning that the organizers could make a profit of almost $20 million. It is a grand prize to play for but several hurdles need to be passed before the organizers get there.

The first is perhaps the most important. F1's race contracts all contain a severe sting in their tails. This comes in the form of escalator clauses which increase the fee by as much as 10 percent annually. It is not known how much Circuit of the America's fee increases annually, but if it is the full 10 percent? By the tenth year of its F1 contract it will be paying around $59 million. This would leave a shortfall of $34 million, even assuming that it gets the full $25 million state subsidy.

The second question is precisely how much will the state pay out in the subsidy. If Circuit of the Americas has to cover a shortfall in the hosting fee, that will soon eat into any of its profit. At least two studies analyzing the economic impact will be done after Sunday's Grand Prix—so the organizers have precious few hours remaining to do as much as they can to attract as many spectators as possible and convince them to spend their money in Austin. The race is most certainly on.